12.3.4 Reductions in Price

A seller’s reduction in the price of the property does not give rise to cancellation of debt income.1  Instead, the buyer’ basis in the property is reduced. If a lender reduces the principal for an early payout or as part of a loan modification, the amount of cancelled debt is cancellation of debt income. However, if the debt is non-recourse and the owner retains the collateral, the owner does not have cancellation of debt income.

• 1I.R.C. § 108(e)(5).